Suck Less At Budgeting In Your Twenties

If I had a superpower, it would be the power of self-control. I know that’s mega-lame and a waste of a perfectly good super-power opportunity, but some days it just takes more willpower to make a good decision than to read minds.

It takes all I’ve got NOT to swing by McDonald’s after work. And once I’m at McDonald’s, it takes all my energy NOT to order two ice cream cones. And once I’ve ordered the two ice cream cones, it takes all I’ve got NOT to eat them in one, horrendous motion. So, self-control.

My problems are only amplified when it comes to money. I know that I need to save for retirement and give charitably and live below my means, but the guacamole option for my burrito seems like a much better idea.

Combine our generation’s lack of self-control, lack of education, lack of planning, and the fact that we see 3,000 advertisements each day and it becomes clear why 20somethings struggle with money and budgeting.

But fear not. You’re about to get the greatest superpower of all: learning something from an article. Let’s dive into budgeting in your 20’s.

Good Ideas

If personal finance was a foot race, we would all start the race in a different place and with a different physique. Some of us may have been lucky enough to graduate college with zero debt and a great job, but that’s only a head-start. If you don’t have the stamina to keep moving forward, you’ll quickly fall behind those that started miles away.

Below is a list of principles and habits that I believe will get our finances in good running shape so that we can run the race of personal finance without (metaphorically) pooping our pants from exhaustion.

Name Every Dollar

“What’s in a name? A rose by any other name would smell as sweet.”

–Romeo, Romeo & Juliet

My mom struggled to get pregnant for 5 years. To her, my birth was a miracle. That’s
why she named me Matthew—which means “gift from God.” Cool story, right!?

While Romeo and Juliet would disagree, a thoughtful name means a lot. The same is true of your money.

Setting a budget is the practice of naming every dollar in your bank account. An unnamed dollar is an orphan and it will never love you or your goals in life. Budgeting is about giving your money purpose and meaning. You might bring in $10,000/month, but if you aren’t thoughtful about giving your money a name and a purpose, someone else will. And that name won’t be as cool as mine.

Next time you get a paycheck, sit down and name every dollar in your bank account. Give those dollars a purpose and a destination. If you are thoughtful and consistent about giving meaning to your money, it will love you like I love my mom.

(To be clear, I mean that you should put every dollar of your paycheck into a specific spending category. I don’t mean that you should buy a book of baby names. That’s weird. Don’t be weird. You’ll find examples of different categories at the end of this article.)

Automate

“Buster so excelled at being neither seen nor heard that he remained at the school a full two semesters after he was supposed to graduate.”

– Ron Howard, Arrested Development

The most important things in our budget are pretty lame and they cost a lot of money. It’s painful to write a big check every month for retirement savings, rent, and debt reduction. And it’s impossible to write that check if we’ve already spent the money on concert tickets and frappuccinos.

Solution: automation.

Automation takes most of the hard work out of budgeting by making our money “neither seen nor heard.” We can’t spend what we don’t have in our account. And we won’t even realize we had it in the first place!

So our goal is to find as many ways as possible to automate our finances. This means setting up automatic withdrawals for things like savings, retirement, charitable giving, rent, utilities, debt reduction, insurance, and anything else that can be automated.

The less we have to think about this stuff the more likely we will succeed.

Set Goals

“A man without a goal is like a ship without a rudder.”—Thomas Carlyle

Setting a goal doesn’t magically get us anywhere in life. Not setting goals, though, does magically keep us from going anywhere in life. So let’s set some financial goals and take them one at a time. Here are a few ideas:

Read more articles about personal finance

Eliminate all credit card debt

Eliminate all student loan debt

Max out a Roth IRA this year

Start a side-hustle that pays $500/month

Buy your next car with a briefcase full of cash

Start an emergency fund

Save for a 20% down-payment on a house

Save for a vacation to Thailand

Buy a guitar

Buy an engagement ring

Buy a wife from Ukraine for that engagement ring

Emergency Fund

There are only a few things in life that we need to buy RIGHT NOW. Unfortunately, they’re usually the result of an emergency. And a car crash, lost job, or medical emergency can derail all of our best-laid plans and leave us reeling (financially) for months or years.

Since no one plans on having an emergency, very few save for one.But we’re different. We laugh in the face of calamity. Why? We have an emergency fund.

How much should we save for this emergency fund?

Are you single? Save one month of take-home income.

Married? Save three months.

Married+Kids? Save six months.

By saving 15-30% of our paycheck every month, we can meet your goal within six months to two years. Then, we can start allocating that money to another financial goal.

Suck it, emergencies.

Allowance

“If you want to recapture your youth, just cut off his allowance.”

-Al Bernstein

After all of our diligent and militant budgeting, sometimes we just want to buy a Snickers and not justify it to our budget. This is where an allowance comes in handy. It keeps us honest to our budget, but still lets us treat ourselves.

Budgeting is too tightly associated with being nit-picky or cheap. Budgeting isn’t supposed to suck away your life. You should be able to spend money on things that make you happy and still move toward your financial goals.

For me, this usually looks like a set amount of money that goes toward movies, board games, alcohol, and saving for guitar and camera gear. It’s my allowance.

Delay Out-of-Budget Purchases

We all get caught up in the moment. In the throes of passion I have spent hundreds of dollars on things that I would never use. Did I need recording software and professional-grade speakers last year? Absolutely not. Did I buy both? Absolutely. Did the money come from my well-saved allowance? Ha.

There are very, very few things that we need right now. Just about every purchase that would be made out-of-budget can be delayed until it is accounted for in the budget. Giving yourself a week, month, or year to think about a big purchase might even convince you that you don’t need it in the first place.

Cut Yourself Some Slack

You’re going to over-spend in a few categories as you get started. You will fail, but don’t let it keep you from long-term financial freedom and control. You’ll get better month after month. Cut yourself some slack and budget some money to cover up your mistakes. Acknowledge them as mistakes and move on.

I set aside $30 each month to a category I call “Buffer.” This is for spending mistakes like parking tickets and McDonald’s.

Helpful Tools

While I suggest using pen and paper for a while to master the fundamentals of budgeting, there are tools out there that will simplify things. I hate being overwhelmed with options, so I’ll give your three.

Any “benefit” you receive from a credit card is psychologically designed to get more money out of you than back to you. That 2% cash back benefits the credit card company, NOT YOU! It’s very tempting to leverage credit cards for points, but don’t. Behavioral psychology trumps financial literacy here.

So hide your credit cards in the freezer. Or cut them up. Please. Every perk that you receive from a credit card is designed to hurt you more than help you.

And screw credit scores. You can worry about that when you have an emergency fund, no debt, and have maxed out your Roth IRA for a year.

Budgeting Mentality

I like to think of a budget in two different ways. There’s the financial literacy aspect and the behavioral psychology aspect. Let’s consider both.

Financial Literacy

Concerning financial literacy, the 50-20-30 Rule works great. There are more complicated and nuanced systems, but I prefer simplicity and flexibility. Applying these percentages to your take-home pay is a solid way to craft a budget.

50% – Constants (Past)

Rent, utilities, cell phone, insurance, car payment

Charity, subscriptions, gym

20% – Financial Goals (Future)

Debt repayment

Retirement, savings, investing

Saving for Ukrainian Wife

30% – Variables (Present)

Groceries, restaurants, shopping

Hobbies, entertainment, gas, date money

Behavioral Psychology

The above percentages are great, but spending money isn’t that simple. How we spend money is complicated. The way I think about it, we spend money in three different ways: on the Past, in the Present, and for the Future.

Past

Based on our choices in the past, we now make consistent payments to retain our standard of living. We chose to live in a certain type of house in the past and now we pay rent or a mortgage. We chose a certain style of car, an insurance plan, a gym membership, and cell phone plan in the past and now we make monthly payments.

“Past” money is boring money. We don’t really want to spend it, but we have to. This is the easy money to automate.

Future

Those who delay gratification live happier lives. We can practice delayed gratification with our money by setting it aside for something awesome in the future.

“Future” money is also boring money… for now. We don’t want to spend it, but we should. This makes it the best candidate for automation because it is the easiest component to forget or neglect.

Present

“Present” money is not boring money. It is the best money! Present money is burritos and concerts and Dr. Who t-shirts. Present money is paint-balling and skydiving and road trips. No one needs to teach us to spend money on the present. It is important money, but never at the expense of “past” and “future” money.

Honestly, all we’re doing when we make a budget is making sure that all of the “past” and “future” money goes to the right place so that we can get the appropriate amount of awesome out of our “present” money.

With all of this in mind, I think we’re ready to make our own budget now. Grab a piece of paper and get to work. Here are a few examples from my friends.

Examples

Jordan: 1st-Year Teacher

Take-Home Income: $2,000/month

Constants

Rent and Utilities: $470

Car Insurance: $70

Union Fee: $65

Cell Phone: $60

Gym: $35

“Few Times A Year” Fund: $100

(oil changes, haircuts, vehicle registration, etc.)

Total: $800 (40%)

Financial Goals

Student Loans: $220

Savings: $425

Total: $645 (32%)

Variables

Gas: $75

Food: $225

Entertainment: $15

Gifts: $15

Buffer: $40

Charitable Giving: $190

Total: $560 (28%)

(Percentages would be different, depending on how you categorize different things. “Charity” is tricky.)

Joel: Graphic Designer

Take-Home Income: $2,500/month

Constants

Rent and Utilities: $800

Car Payment: $200

Insurance: $80

Cell Phone: $45

Subscriptions: $40

Gym: $35

Total: $1,200 (48%)

Financial Goals

Roth IRA: $350

Savings: $200

Total: $550 (22%)

Variables

Gas: $120

Coffee: $60

Groceries: $225

Restaurants: $100

Allowance: $200

Buffer: $45

Total: $750 (30%)

Nate and Bekah: Missionaries

Take-Home Income: $1,800/month

Constants

Rent and Utilities: $600

Insurance: $50

Cell Phones: free

Total: $650 (36%)

Financial Goals

Roth IRA: $340

Total: $340 (19%)

(Have already saved $10,000 in emergency fund)

Variables

Gas: $200

Food: $250

Nate Personal: $15

Bekah Personal: $15

Entertainment: $30

Charitable Giving: $300

Total: $810 (45%)

Mark: Waiter

Take-Home Income: $1,300/month

Constants

Rent and Utilities: $325

Insurance: $50

Cell Phone: $45

Subscriptions: $40

Gym: $35

Total: $495 (38%)

Financial Goals

Roth IRA: $75

Savings: $200

Total: $275 (21%)

Variables

Gas: $75

Coffee: $30

Food: $225

Allowance: $50

Charitable Giving: $150

Total: $530 (41%)

I hope that this article and these examples were helpful. Good luck!

Matt

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